SPX Credit Spread Trader

[jeffm]

Quote from rdemyan:

Let's assume a black swan event. Say a 100 point drop from 1250.

Worst case scenario, you still have a 20 pt spread. So your max loss (barring a failure of the financial system) is 20 points + the debit you paid for the spread.

Volatility shouldn't have much effect on options that are deep deep ITM. Although in a truly beserk market, I suppose anything goes...

 

[Prevail]

agreed it is attractive in the last week, thanks for the numbers.

Quote from jeffm:

Just a reminder of Murray's position:
Position #3
STO July 1250p - $20.00 STC July 1250p - expired, pending SET
BTO Aug 1230p - $20.90 BTC Aug 1230p - $13.20

Ignoring that SET was 1251, lets just play with the numbers...

Lets assume SPX drops to 1230 today. Where would this diagonal end up?
Short 1250P loses 20 pts.
Initial debit was 0.90 pts.
The question then becomes, "what is the value of the AUG 1230P?"
SPX is currently 1240, so I'll just use the AUG 1240P as a ballpark value for the ATM 1230P if SPX dropped to 1230.
SPX 1240P is 18x20, so lets just call it 19. If we did drop another 10 pts, the volty bump would help the long put, but we'll ignore that for simplicity.

So the final trade value is (20) + (0.9) + 19 = (1.9)

I'm gonna say that's not too bad for a suprise 1 day move where the market plunges 20 points below your short.

As rallymode alluded to, a drop to your short strike that happens with two weeks remaining is much more painful.

If the market closed right here at 1240, the AUG1230P is worth 15, so the trade still nets (10) + (0.9) + 15 = 4.1 pts. Still a nice result considering an unpleasant expiration day. Plus the other put diagonals that are expiring OTM will all benefit nicely from this move down.

 

[rdemyan]

Hmmm. I seem to remember Murray saying that these diagonals give you black swan protection vis-a-vis a credit spread.

You're worst case scenario doesn't show any protection relative to a credit spread. I know you're saying anything could happen, but still it would be nice to know if the protection will be there or not.

BTW: What do you mean by "barring a failure of the financial system"??

Quote from jeffm:

Worst case scenario, you still have a 20 pt spread. So your max loss (barring a failure of the financial system) is 20 points + the debit you paid for the spread.

Volatility shouldn't have much effect on options that are deep deep ITM. Although in a truly beserk market, I suppose anything goes...

 

[ryank]

Quote from rdemyan:

Hmmm. I seem to remember Murray saying that these diagonals give you black swan protection vis-a-vis a credit spread.

You're worst case scenario doesn't show any protection relative to a credit spread. I know you're saying anything could happen, but still it would be nice to know if the protection will be there or not.

BTW: What do you mean by "barring a failure of the financial system"??

I believe he said the black swan protection is for call diagonals done for a credit, not put diagonals.

 

[rdemyan]

But that's true of call credit spreads as well. So, if that's the case, there's no advantage with regards to black swans.

Quote from ryank:

I believe he said the black swan protection is for call diagonals done for a credit, not put diagonals.

 

[dagnyt]

Quote from jeffm:


Volatility shouldn't have much effect on options that are deep deep ITM. Although in a truly beserk market, I suppose anything goes...

History says you are wrong. In Oct, 1987, a time when VIX reached 150, option time premium was worth it's weight in platinum. That means the time spread portion of the posiiton would allow for recovery of a significant part of the loss.

Mark

 

[jeffm]

I believe you are thinking of the posts he has made on ratio diagonals.

Just imagine for a regular diagonal you were short the AUG1340P and long the SEP1320P with a debit of 1 point. Go look at today's prices for that spread. (For those reading this later...its about 20 points)

Now what if you were short 10 of the AUG1340P, and long 12 of the 1320P. Your initial debit would have been higher, but now check out the total position value.

Just for grins, since we're talking about black swan protection, look at the prices for a plain-jane calendar. Short AUG1340, long SEP1340. (Again for the lurkers...the spread is about 2 points).

I'm not advocating any of these trades as better or worse initially. But 100 points ITM, there is certainly a clear winner. If only we could forsee a 100 point move...

Quote from rdemyan:

Hmmm. I seem to remember Murray saying that these diagonals give you black swan protection vis-a-vis a credit spread.

BTW: What do you mean by "barring a failure of the financial system"??

I mean that I'm not Nostradamus. Hell, I'm not even Jimmy the Greek If your black swan turns into a black elephant, who can say what the results might be?

Its all probability versus risk/reward.
Chance of an asteroid hitting us is tiny, but the risk/reward is inversly terrible.

Chance of getting killed in a car wreck on the way to the grocery is pretty small. If you only look at risk/reward...is the gallon of milk worth gambling with your life? Some people do see it that way, and are afraid to leave the house. Other people are the quarterback of the Steelers and ride their motorcycle without a helmet.
Everyone has to work with a risk/reward and %win/loss that they are comfortable with.

 

[jeffm]

Quote from dagnyt:

History says you are wrong. In Oct, 1987, a time when VIX reached 150, option time premium was worth it's weight in platinum.

Today, the SEP1340P is 100 points ITM and is trading for about 93. What can this put possibly trade up to? Anything over 100 is free arb money. I don't see any platinum between 93 and 100.

ATM, OTM and many ITM options would certainly have huge premium after a black swan. But we're talking WTF-ITM, not ATM.

 

[rdemyan]

Here's a response from Murray to an earlier post:

"You may want to consider Diagonals instead of credit spreads if you're really concerned about 'Black Swan' events."

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Quote from Synaptic:

Coach,

The volatility changes over the last month have me thinking that I don't want to do PUT spreads anymore, only CALL spreads. I'm just concerned that a black-swan event or run of panic selling could crtically hurt my account and psyche. I'm starting to think that I only want to do credit spreads exclusively when stochastics look right and I can stay FOTM. I want to then possibly augment these trades with debit spreads where my potential loss is known up-front. Any comments ?
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But let's not dwell on this, since Murray's off sailing.

Can we take a closer look at call diagonals. If I recall correctly, these can generally be put on for a small credit.

Quote from jeffm:

I believe you are thinking of the posts he has made on ratio diagonals.

 

[dagnyt]

Quote from rdemyan:


Can we take a closer look at call diagonals. If I recall correctly, these can generally be put on for a small credit.

Any diagonal - put or call - can be put on for a credit. Obviously, the amount of credit (or debit) depends on the distance between the strikes.

Mark